The deals to quarantine some of those brands to be sold only in Woolworths or Coles are part of plans to generate better growth at the less profitable end of Treasury’s wine portfolio.
Photo: Bloomberg

by
Simon Evans

Treasury Wine Estates
is looking to strike exclusive supply deals with major liquor retailers
Woolworths
and
Coles
whereby it will only sell some of its lesser-known brands in outlets ­controlled by the two firms.

The deals to quarantine some of those brands to be sold only in Woolworths outlets, or only those operated by Coles, are part of the plan by new chief executive
Mike Clarke
to try and generate better growth at the less profitable end of Treasury’s 83-strong wine brand portfolio.

“We are going to have a good look at Brand A as an exclusive," Mr Clarke said.

He declined to specify which of the more commercial brands might be included in this strategy built around a retailer exclusive.

Other large independent liquor chains may also be involved in separate exclusive deals.

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There are also plans to remove between 10 to 15 brands from the lower-end of the portfolio either through a sale, a joint-venture arrangement or by simply discontinuing a brand.

That whittling down of the portfolio would be a gradual staged process to extract maximum value and avoid a fire sale of brands all in one hit.

“They could be sold or they could be a joint venture," he said.

But the top 20 “power brands" which Mr Clarke has outlined for several weeks as being integral to his turnaround strategy for Treasury and which will receive most of a 50 per cent increase in marketing spend will be untouchable in the overhaul. A collection of around 20 other brands which are referred to internally at Treasury as “regional champions" will also be quarantined. Big-selling commercial brands including Rosemount and Lindemans will also be the recipients of major investment in brand-building.

The “power brands" include Penfolds, Wolf Blass, Wynns, Matua from New Zealand and the Californian wine brands Chateau St Jean and Beringer.

release date of high-end lines changed

Those in the next set of around 20 brands in the regional champions list include Devil’s Lair from Western ­Australia’s Margaret River region and Coldstream Hills from Victoria’s Yarra Valley.

Treasury shares continued to rise on Thursday, gaining 1.3 per cent by mid-day to be at $5.13 before fading to close 2¢ higher at $5.09. This followed a strong gain of 5 per cent on Wednesday after an announcement that included another hefty write-down of $260 million on commercial wine brands and infrastructure mainly related to the US , and plans to shift the release date of high-end Penfolds wines to October.

While not spelling it out specifically – there was no mention of any profit downgrade – Treasury in practical terms also affirmed on Wednesday that it had met a full-year profit forecast band of between $190 million to $210 million in earnings.

Private equity firm Kohlberg Kravis Roberts made a $4.70 per share buyout proposal for Treasury on April 16 which only became public on May 20. It valued Treasury at $3.1 billion but was rejected by the Treasury board.

The shift of the Penfolds releases from March and May to October will undo two decades of convention and mean there will be a second release of the flagship Penfolds Grange this year in October.

The 2010 Grange will be released then, just six months after the 2009 version was released on May 1 this year with a retail price of $785 per bottle.

Mr Clarke said Woolworths and Coles were both receptive to the changes to the high-end Penfolds wine release date changes, and he had been in high-level talks with them for almost two months about it rather than just spring the changes upon them.

“Positive and engaged,’’ he said when asked about what the big retailers thought about the changes to the ­Penfolds timetable.

Woolworths owns the Dan Murphy’s liquor superstores chain along with the mid-market BWS chain, while Coles runs First Choice, Liquorland and Vintage Cellars.

Stockbroker Citi warned in a note on Treasury after the raft of announcements on Wednesday there was a risk of a disappointing 2014-15 at Treasury. Analysts Gino Rossi and Craig Woolford suggested the possibility of a weak financial result in 2014-15 meant “that KKR or any other suitors can afford to be patient".

They recommended that investors sell their Treasury shares: “With the share price running ahead of KKR’s $4.70 bid we think the risks around a weak FY15 result outweigh any potential upside from a higher bid."

One of their concerns is that Treasury appeared to be running behind schedule in its efforts to re-adjust inventory levels in the United States operations after running into serious problems in 2013 with too much stock in the warehouses of third-party distributors.

The analysts suggested that a “stock destruction" part of the plan had happened, but that plans to ship fewer cases of wine into the distributors system to ensure that any oversupply into the market was well and truly eradicated still had further to go and there would need to be a further deliberate slowing of shipments in the 2014-15 year.

The troubles in the US last year led to the axeing of former Treasury chief executive David Dearie in late 2013, who was replaced by Mr Clarke on March 31 this year.

Treasury in mid-2013 announced $160 million of write-downs connected with the US business including an infamous move to destroy $35 million worth of bottled wine in distributors’ warehouses.

This involved the crushing of six million bottles of low-priced wine in cartons using steamrollers and special environmental clean-up techniques.